Why The Permian Basin May Become The World's Most Productive Oil Field

FILE - In this April 24, 2015 file photo, pumpjacks work in a field near Lovington, N.M. Thanks to more barrels of oil being pumped monthly from the Permian Basin, New Mexico is among the nation's top producing states. Industry officials in New Mexico say billions of dollars of investment by energy companies in the state is paying off as production is reaching record highs. Photo credit: ASSOCIATED PRESS

Many people will tell you that the production rate of Saudi Arabia’s Ghawar oil field, which has yielded 5 million barrels of petroleum per day for decades, will never be surpassed. In fact, no other oil field has ever come close to topping the production rate of Ghawar, and up until recently I would have agreed its production would never be topped.

But I am becoming more convinced that the Permian Basin could eventually give Ghawar a run for its money.

That argument would have been laughable a decade ago, but there are three pieces of data that suggest the argument isn't as preposterous as I once believed it was.

A Rapidly Rising Production Rate

First, there is the actual production rate in the Permian. Consider for a moment that the Permian Basin has been producing oil since the 1920s, and reached the two million BPD mark in the 1970s. Production slowly declined, until dipping back under one million BPD around the turn of the 21st century.

Permian Basin oil production slowly crept back up to one million BPD in 2010, and then hydraulic fracturing sent production soaring. By the end of 2018, production had reached 3.8 million BPD, vaulting the Permian into second place among the world's leading oil fields. In under a decade -- and after already producingoil for a hundred years -- Permian Basin production has increased by 3 million BPD:

Permian Basin oil production 2007-2018Robert Rapier

A Soaring DUC Inventory

But are there indications that Permian production will continue to grow? Yes. Consider the soaring inventory of drilled but uncompleted (DUC) oil wells. These are oil wells that have undergone the initial process of drilling (i.e., the hole in the ground has been drilled). However, to get the well ready for production requires casing, cementing, perforating, and hydraulic fracturing.

There are a number of reasons that a well might be drilled, but not completed. It can be as simple as a lack of available rigs and manpower to complete the wells. Or, it could be that producers are waiting for more takeaway capacity for the oil, which has been an issue in the Permian. Finally, some contracts may require that drilling has been initiated in order to hold a lease.

Regardless of the reason, DUC wells generally turn into completed wells. And the inventory of DUC wells suggests that Permian Basin production still has a lot of room to run. At the end of 2013, there were 636 DUC wells in the Permian Basin (when oil production there was 1.4 million BPD). By the end of 2018, with Permian Basin production at 3.8 million BPD, the number of DUC wells had soared to 4,039.

Drilled, but uncompleted wells in the Permian Basin.Robert Rapier

Oil producers have drilled an average of 5,316 wells per year in the Permian over the past five years, but have only completed an average of 4,620 wells per year. If all drilling suddenly ceased in the Permian, there is nearly a year's worth of drilled inventory that still needs to be completed. That's a lot of oil waiting to be extracted.

An Enormous Resource

The final piece of the puzzle is the amount of oil that remains to be extracted. In just the Texas part of the Permian, ~30 billion barrels of crude and ~75 trillion cubic feet (Tcf) of natural gas have already been extracted. But a new assessment by the U.S. Geological Survey (USGS) has suggested that there's still a lot to be extracted.

In 2016, the USGS had estimated that theWolfcamp shale in the Midland Basin portion of the TexasPermian Basin contains a mean of 20 billion barrels of oil, 16 Tcfof associated natural gas, and 1.6 billion barrels of natural gas liquids (NGLs). This estimatewas for undiscovered, technically recoverable resources, and wasthe largest estimated continuous oil accumulation that USGS had ever assessed in the U.S.

In its most recent report, the USGS has included the Wolfcamp shale and Bone Spring Formation of the Delaware Basin portion of the Permian Basin for the first time, and the estimates are eye-popping. The new estimated mean of undiscovered, technically recoverable resources in the Permian basin are 46.3 billion barrels of oil, 281 Tcf of natural gas (17.5 times higher than the 2016 estimate!), and 19.9 billion barrels of NGLs.

It is important to note that these estimates are of technically recoverable resources, as opposed to proved reserves. The difference is that the latter must be economically recoverable at prevailing prices. That may not be the case for a good portion of these resources, but that can change if oil and natural gas prices rise.

Nevertheless, it's hard to escape the possibility that 1). Given the three million BPD of crude oil production added in the past decade; 2). The huge inventory of DUC wells; and 3). The enormous size of the resource -- it isn't crazy to think that in a few years the Permian could be out-producing Saudi Arabia's massive Ghawar oilfield. It would have been crazier in 2007 to suggest that the Permian would be closing in on four million BPD at the end of 2018.

So, never say never -- although oil prices and available logistics will have a big impact on how it all pans out.

Robert Rapier has over 25 years of experience in the energy industry as an engineer and an investor. Follow him on Twitter @rrapier or at Investing Daily.

Robert Rapier is a chemical engineer in the energy industry. Robert has 25 years of international engineering experience in the chemicals, oil and gas, and renewable energy industries, and holds several patents related to his work. He has worked in the areas of oil refining...